Corporation Tax Bill

House of Commons

Session 2009 - 10
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
248

Non-charitable expenditure
496
Meaning of “non-charitable expenditure”
(1)
For the purposes of this Part a charitable company’s non-charitable
expenditure for an accounting period is—
(a)
any loss made in the accounting period in a trade carried on by the
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charitable company unless—
(i)
the trade is a charitable trade, or
(ii)
the trade is not a charitable trade but profits of the trade arising
in the period would be exempt from corporation tax as a result
of one of the exemptions in section 480, 483 or 484,
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(b)
any loss made in the accounting period in a trade, or in a UK property
business or an overseas property business, carried on by the charitable
company, if—
(i)
the loss relates to land, and
(ii)
profits of the trade, or income of the business, generated from
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the land in the period would not be exempt from corporation
tax as a result of the exemptions in section 485,
(c)
any loss made in the accounting period in a miscellaneous transaction
entered into by the charitable company otherwise than in the course of
carrying out a charitable purpose,
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(d)
any expenditure incurred by the charitable company in the accounting
period which is not incurred for charitable purposes only and is not
required to be taken into account in calculating—
(i)
the profits of, or losses made in, any trade, UK property
business or overseas property business carried on by the
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charitable company, or
(ii)
the profit or loss made in any miscellaneous transaction entered
into by the charitable company,
(e)
any payment made in the accounting period by the charitable company
to a substantial donor which is treated under section 504(1) or (5) as
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non-charitable expenditure,
(f)
any non-charitable expenditure treated as incurred under section
504(2) as a result of a transaction between the charitable company and
a substantial donor,
(g)
the amount of any of the charitable company’s funds that is invested in
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the accounting period in an investment which is not an approved
charitable investment (see section 511), and
(h)
any amount lent in the accounting period by the charitable company, if
the loan is neither an investment nor an approved charitable loan (see
section 514).
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But anything which falls within more than one of the above paragraphs counts
as non-charitable expenditure only once.
(2)
An amount may also be non-charitable expenditure for an accounting period
as a result of section 515 (excess expenditure treated as non-charitable
expenditure of earlier periods).
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(3)
This section needs to be read with—
section 479 (meaning of “charitable trade”),
sections 497 to 501 (supplementary provision in relation to this section, in
particular in relation to subsection (1)(d), (g) and (h)),

Corporation Tax Bill
Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
249

sections 502 to 510 (transactions with substantial donors),
section 511 (approved charitable investments), and
section 514 (approved charitable loans).
497
Section 496: supplementary
(1)
This section applies for the purposes of section 496.
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(2)
A transaction is a miscellaneous transaction if it is of such a nature that, if
income or gains had arisen from it (ignoring section 481 (exemption from
charges under provisions to which section 1173 applies)), it would have been
charged to corporation tax under or by virtue of any provision to which section
1173 applies.
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(3)
For rules about the calculation of losses, see—
(a)
section 47 of CTA 2009 (losses of a trade calculated on same basis as
profits),
(b)
section 210 of that Act (which applies section 47 of that Act, so that
losses of a UK property business or overseas property business are
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calculated on the same basis as profits), and
(c)
section 1306 of that Act (losses from miscellaneous transactions
calculated on same basis as miscellaneous income).
498
Section 496(1)(d): meaning of expenditure
(1)
For the purposes of section 496(1)(d) “expenditure” includes expenditure of a
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capital nature.
(2)
None of the following is “expenditure” for those purposes—
(a)
the investment of any of the charitable company’s funds,
(b)
the making of a loan by the charitable company, or
(c)
the repayment by the charitable company of the whole or a part of a
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loan made to it.
499
Section 496(1)(d): accounting period in which certain expenditure treated as
incurred
(1)
This section applies for the purposes of section 496(1)(d).
(2)
Subsection (3) applies to expenditure which is referable to commitments
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(whether or not of a contractual nature) that the charitable company has
entered into before or during an accounting period.
(3)
The expenditure is treated as incurred in the accounting period if, had the
charitable company been required to draw up accounts that met the
requirements mentioned in subsection (4), the expenditure would have been
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required to be taken into account in preparing those accounts.
(4)
The requirements referred to in subsection (3) are—
(a)
that the accounts are drawn up for the accounting period, and
(b)
that UK generally accepted accounting practice applies with respect to
them.
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Corporation Tax Bill
Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
250

500
Section 496(1)(d): payment to body outside the UK
A payment made, or to be made, to a body situated outside the United
Kingdom is non-charitable expenditure under section 496(1)(d) if—
(a)
it is incurred for charitable purposes only, but
(b)
a charitable company has not taken such steps as are reasonable in the
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circumstances to ensure that the payment will be applied for charitable
purposes.
501
Section 496(1)(g) and (h): investments and loans
(1)
Subsection (2) applies if in an accounting period a charitable company—
(a)
realises the whole or part of an investment which was made in the
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period and is not an approved charitable investment (see section 511),
or
(b)
is repaid the whole or part of a loan which was made in the period and
is neither an investment nor an approved charitable loan (see section
514).
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(2)
Any further investment or lending in the accounting period of the sum realised
or repaid, so far as it does not exceed the sum originally invested or lent, is not
non-charitable expenditure as a result of section 496(1)(g) or (h).
Substantial donor transactions
502
Transactions with substantial donors
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(1)
For the purposes of this section and sections 504 to 506, “substantial donor
transaction” means any of the following—
(a)
the sale or letting of property by a charitable company to a substantial
donor,
(b)
the sale or letting of property to a charitable company by a substantial
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donor,
(c)
the provision of services by a charitable company to a substantial
donor,
(d)
the provision of services to a charitable company by a substantial
donor,
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(e)
an exchange of property between a charitable company and a
substantial donor,
(f)
the provision of financial assistance by a charitable company to a
substantial donor,
(g)
the provision of financial assistance to a charitable company by a
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substantial donor, and
(h)
investment by a charitable company in the business of a substantial
donor.
(2)
For the purposes of this section and sections 504 to 506, a person is a substantial
donor to a charitable company for an accounting period if—
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(a)
the charitable company receives relievable gifts of at least £25,000 from
the person in a period of 12 months in which the accounting period
wholly or partly falls, or

Corporation Tax Bill
Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
251

(b)
the charitable company receives relievable gifts of at least £150,000
from the person in a period of 6 years in which the accounting period
wholly or partly falls.
(3)
If a person is a substantial donor to a charitable company for an accounting
period as a result of subsection (2)(a) or (b), the person is a substantial donor to
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the charitable company for each of the following 5 accounting periods.
(4)
A transaction entered into in an accounting period with a person who is a
substantial donor for that period may be a substantial donor transaction, even
if it was not until after the transaction was entered into that the person first
satisfied the definition of “substantial donor” for the period.
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503
Meaning of “relievable gift”
A gift is a “relievable gift” for the purposes of section 502(2) if relief is available
in respect of it under—
(a)
Part 6 (charitable donations relief),
(b)
section 257 of TCGA 1992 (gifts of chargeable assets),
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(c)
section 63 of CAA 2001 (gifts of plant or machinery),
(d)
sections 713 to 715 of ITEPA 2003 (payroll giving),
(e)
section 108 of ITTOIA 2005 (gifts of trading stock),
(f)
sections 628 and 630 of ITTOIA 2005 (gifts from settlor-interested
trusts),
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(g)
Chapter 2 or 3 of Part 8 of ITA 2007 (gift aid and gifts of shares,
securities and real property), or
(h)
section 105 of CTA 2009 (gifts of trading stock to charities etc).
504
Non-charitable expenditure in substantial donor transactions
(1)
A payment made by a charitable company to a substantial donor in the course
25
of, or for the purposes of, a substantial donor transaction is treated for the
purposes of section 496 as non-charitable expenditure.
(2)
If the terms of a substantial donor transaction are less beneficial to the
charitable company than terms which might be expected in a transaction at
arm’s length, the charitable company is treated for the purposes of section 496
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as incurring non-charitable expenditure.
(3)
The amount of the non-charitable expenditure that the charitable company is
treated as incurring under subsection (2) is equal to the amount which an
officer of Revenue and Customs determines as the cost to the charitable
company of the difference in terms.
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(4)
A charitable company is treated as incurring non-charitable expenditure under
subsection (2) at such time (or times) as an officer of Revenue and Customs
may determine.
(5)
A payment by a charitable company of remuneration to a substantial donor is
treated for the purposes of section 496 as non-charitable expenditure unless it
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is remuneration, for services as a trustee, which is approved by—
(a)
the Charity Commission,
(b)
another body with responsibility for regulating charities by virtue of
legislation having effect in respect of any part of the United Kingdom,
or
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Corporation Tax Bill
Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
252

(c)
a court.
(6)
If remuneration is paid otherwise than in money, subsection (5) applies as if it
had been paid in money of an amount that would, under Part 3 of ITEPA 2003,
be the cash equivalent of the remuneration as a benefit.
505
Adjustment if section 504(1) and (2) applied to single transaction
5
(1)
Either or both of subsections (1) and (2) of section 504 may be applied to a
single transaction between a charitable company and a substantial donor.
(2)
But if they are both applied, the amount of non-charitable expenditure that the
charitable company would, apart from this subsection, be treated as incurring
under section 504(2) in respect of the transaction, is reduced by the section
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504(1) amount (but is not to be reduced below nil).
(3)
The “section 504(1) amount” means the amount of any payment made by the
charitable company, in the course of, or for the purposes of, the transaction,
that is treated as non-charitable expenditure under section 504(1).
506
Section 504: certain payments and benefits to be ignored
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(1)
In the application of section 504, payments by a charitable company, or benefits
arising to a substantial donor from a transaction, are to be ignored so far as—
(a)
they relate to a donation by the donor, and
(b)
either condition A or condition B is met.
(2)
Condition A is that—
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(a)
the donation is made by an individual, and
(b)
the payments or benefits do not prevent the donation being a
qualifying donation for the purposes of Chapter 2 of Part 8 of ITA 2007
because of section 416(7)(b) of that Act (restrictions on associated
benefits).
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(3)
Condition B is that—
(a)
the donation is made by a company, and
(b)
the payments or benefits do not prevent the donation being a
qualifying donation for the purposes of Chapter 2 of Part 6 because of
section 191(7) (restrictions on associated benefits).
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507
Transactions: exceptions
(1)
A transaction within section 502(1)(b) or (d) is not a substantial donor
transaction if an officer of Revenue and Customs determines that the
transaction—
(a)
takes place in the course of a business carried on by the substantial
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donor,
(b)
is on terms which are no less beneficial to the charitable company than
those which might be expected in a transaction at arm’s length, and
(c)
is not part of an arrangement for the avoidance of any tax.
(2)
The provision of services to a substantial donor is not a substantial donor
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transaction if an officer of Revenue and Customs determines that those services
are provided—

Corporation Tax Bill
Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
253

(a)
in the course of carrying out a primary purpose of the charitable
company, and
(b)
on terms which are no more beneficial to the substantial donor than
those on which services are provided to others.
(3)
The provision of financial assistance to a charitable company by a substantial
5
donor is not a substantial donor transaction if an officer of Revenue and
Customs determines that the assistance—
(a)
is on terms which are no less beneficial to the charitable company than
those which might be expected in a transaction at arm’s length, and
(b)
is not part of an arrangement for the avoidance of any tax.
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(4)
Investment by a charitable company in the business of a substantial donor is
not a substantial donor transaction if the investment takes the form of the
purchase of shares or securities listed on a recognised stock exchange.
(5)
The following are not substantial donor transactions—
(a)
a disposal at an undervalue in respect of which relief is available under
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section 203 of this Act or section 431 of ITA 2007 (gifts of shares,
securities and real property), or
(b)
a disposal at an undervalue to which section 257(2) of TCGA 1992 (gifts
of chargeable assets) applies,

but such disposals may be taken into account in the application of section
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502(2).
508
Donors: exceptions
(1)
A company which is wholly owned by a charity within the meaning of section
200 is not a substantial donor in relation to a charitable company which owns
it (or any part of it).
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(2)
Subsection (3) applies to any body which—
(a)
is a non-profit registered provider of social housing (see sections 80 and
115 of the Housing and Regeneration Act 2008), or
(b)
is registered under—
(i)
section 1 of the Housing Act 1996,
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(ii)
section 57 of the Housing (Scotland) Act 2001 (asp 10), or
(iii)
Article 14 of the Housing (Northern Ireland) Order 1992 (S.I.
1992/1725 (N.I. 15)).
(3)
The body is not a substantial donor in relation to a charitable company with
which it is connected.
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(4)
For the purposes of subsection (3), a body and a charitable company are
connected if (and only if)—
(a)
one is wholly owned, or subject to control, by the other, or
(b)
both are wholly owned, or subject to control, by the same person.
509
Connected charities
40
(1)
A charitable company and any other charities with which it is connected are to
be treated as a single charitable company for the purposes of sections 502 to
508.

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Part 11 — Charitable companies etc
Chapter 4 — Restrictions on exemptions
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(2)
For this purpose “connected” means connected in a matter relating to the
structure, administration or control of a charity.
510
Substantial donor transactions: supplementary
(1)
In sections 502 to 508—
(a)
a reference to a substantial donor or other person includes a reference
5
to a person connected with the donor or other person,
(b)
“financial assistance” includes, in particular—
(i)
the provision of a loan, guarantee or indemnity, and
(ii)
entering into alternative finance arrangements within the
meaning of section 564A(2) of ITA 2007 or section 501(2) of CTA
10
2009, and
(c)
a reference to a gift of a specified amount includes a reference to a non-
monetary gift of that value.
(2)
On an appeal against an assessment the tribunal may affirm or replace a
decision of an officer of Revenue and Customs under section 504 or 507.
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(3)
The Treasury may by regulations vary a sum, or a period of time, specified in
section 502(2).
(4)
Section 1124 (meaning of “control”) does not apply for the purposes of section
508(4) or 509(2).
Approved charitable investments and loans
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511
Approved charitable investments

An investment is an approved charitable investment for the purposes of
section 496 (meaning of “non-charitable expenditure”) if it is an investment of
any of the following types.
Type 1
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An investment to which section 512 applies.
Type 2

An investment in a common investment fund established under—
(a)
section 22 of the Charities Act 1960,
(b)
section 24 of the Charities Act 1993, or
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(c)
section 25 of the Charities Act (Northern Ireland) 1964.
Type 3

An investment in a common deposit fund established under—
(a)
section 22A of the Charities Act 1960, or
(b)
section 25 of the Charities Act 1993.
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Type 4

An investment in a fund which—
(a)
is similar to a fund mentioned in relation to Type 2 or 3, and
(b)
is established for the exclusive benefit of charities by or under a
provision relating to any particular charities or class of charities
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contained in an Act (including an Act of the Scottish Parliament).